Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Tsaker New Energy Tech (HKG:1986) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What is it?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Tsaker New Energy Tech:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.18 = CN¥338m ÷ (CN¥2.6b - CN¥637m) (Based on the trailing twelve months to December 2021).

Thus, Tsaker New Energy Tech has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 12% generated by the Chemicals industry.

Check out our latest analysis for Tsaker New Energy Tech

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Tsaker New Energy Tech, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

Tsaker New Energy Tech is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 18%. The amount of capital employed has increased too, by 58%. So we're very much inspired by what we're seeing at Tsaker New Energy Tech thanks to its ability to profitably reinvest capital.

One more thing to note, Tsaker New Energy Tech has decreased current liabilities to 25% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

Our Take On Tsaker New Energy Tech's ROCE

In summary, it's great to see that Tsaker New Energy Tech can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Given the stock has declined 16% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Like most companies, Tsaker New Energy Tech does come with some risks, and we've found 2 warning signs that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.